ECONOMYNEXT – Sri Lanka is planning to overtake the nation’s electrical energy pricing methodology, regulatory officers mentioned after a ‘clawback’ clause had undermined cost-reflective tariff and made it unattainable to venture costs inside an inexpensive vary for companies.
Sri Lanka’s regulator reduce electrical energy costs by 20 p.c in January, falling foul of an Worldwide Financial Fund requirement to match prices with costs as a part of efforts to stop a second sovereign default.
The upcoming IMF evaluate can’t be accomplished except the CEB stops losses.
This week the regulator raised tariffs by 15 p.c, reversing a part of the 20 p.c reduce. Companies discover it unattainable to foretell prices, particularly with such wild fluctuations which aren’t present in different international locations.
Regardless of current change price stability offered by the central financial institution (depreciating the rupee has been the important thing purpose for utility losses and unravelling of public funds previously) Sri Lanka’s electrical energy costs are nonetheless extraordinarily risky.
Higher Mechanism
PUCSL officers mentioned in addition they agreed that costs mustn’t fluctuate extensively as had occurred just lately.
“We all know how fluctuating costs can injury companies,” PUCSL Chief P L Chandralal informed reporters.
“We additionally wish to deliver stability in pricing to our tariff mechanism sooner or later. It can take a while. Now we’ve got began a dialogue. We wish to have a greater mechanism.”
The regulator was additionally lowering discriminatory pricing between several types of companies.
Comparable pricing chaos was seen in 2024. Underneath the mechanism the regulator cuts costs requested by the utility by massive margins and is compelled to lift the once more when it runs losses.
Although different international locations even have quarterly or half yearly pricing together with Singapore and Vietnam there are not any chaotic reductions and will increase like in Sri Lanka.
Persevering with the identical value or small adjustments don’t require regulatory approval or protracted public consultations in higher managed international locations.
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EVN, Vietnam’s energy utility in Could raised costs by 4.8 p.c, because the foreign money weakened, below a rule of permitting the utility change costs by as much as 5 p.c with out greater approval.
Clawback and Disaster Chaos
There are additionally political prices below the methodology which undermine public confidence in accountable financial governance.
The opposition is having a subject day with the newest value rise blaming it on the federal government. In January, the credit score for the value reduce went to the regulator, because the Power Ministry, or the federal government didn’t search political recognition as previously by making an attempt to chop costs.
A key downside is the pricing methodology which requires the regulator to ‘clawback’ previous income, which are likely to go up due partially attributable to higher rainfall which will increase era from legacy massive hydro vegetation owned by the ability utility that are absolutely depreciated.
Extreme income from rainfall can be utilized to cut back loans taken to cowl losses (not for asset acquisition) which is able to then scale back curiosity prices and the profit will come to the revenue and loss account completely.
After quick time period loans are repaid, there might be precise money in banks which is able to deliver curiosity to extend income and scale back total prices.
The money be distributed or carried ahead in a reserve for use towards low rainfall within the fast half 12 months, if the regulator insists that there ought to be no income for the CEB.
Director Basic Damitha Kumarasinghe identified that half of the present downside stemmed from the turbulent pricing throughout the financial disaster.
Sri Lanka’s rupee collapsed from 180 to 360 to the US greenback in 2022, after the central financial institution printed cash to push up the price of dwelling (inflation goal) and development (potential output), on prime of earlier collapses from 131 to 184 from 2015 to 2020 following price cuts in 2015 and 2018.
In 2023 the rupee was allowed to understand from 360 to 300 amid deflationary coverage, bringing down prices of all companies throughout the board within the nation, as well as falling coal costs from US financial tightening to the CEB.
Earlier than the newest disaster, electrical energy costs have been final raised when the rupee collapsed from 113 to 130 in 2012 following price cuts from 2011. Costs have been hiked below an IMF program, reversing among the cuts made after coal vegetation have been commissioned.
IMF Program
In 2025 the regulator reduce costs below the problematic methodology, even because the CEB sought to maintain tariffs unchanged with one other IMF program being in place.
Within the final tariff resolution in January, which led to chaotic pricing which needed to be reversed, the CEB anticipated revenues of 229 billion rupees, and requested to take care of tariffs projecting a 2 billion rupee surplus.
The regulator claimed revenues could be 242 billion rupees, which was greater, however not by a giant margin.
The CEB mentioned prices could be 268 billion rupees and the regulator 249 billion rupees.
Nonetheless the regulator ordered the tariff reduce, projecting a 44 billion surplus in comparison with 2 billion by the CEB.
Shortly after the IMF mentioned tariffs weren’t value reflective and a revision could be wanted, which turned out to be right. The IMF stance exhibits that it’s attainable to forecast prices and revenues inside an inexpensive degree of uncertainty.
RELATED : Sri Lanka breaches IMF benchmark after regulator cuts electrical energy costs
Quarterly accounts revealed filed CEB, additionally confirmed an operational loss by December.
Revealed accounts for the primary three months of the CEB confirmed revenues have been solely 93.9 billion rupees and direct prices have been 112 billion rupees earlier than admin prices and curiosity. Often the primary quarter has among the driest climate.
The IMF mentioned it can not move the following evaluate of the Sri Lanka bailout, except costs matched prices. The failure to lift power costs had contributed to financial crises previously courting again to 2001.
In June revision allowed income and allowed prices of round 28 rupees a unit match, in line with PUCSL officers which in idea ought to make tariffs value reflective.
Nonetheless, companies that fund the CEB together with Asian Improvement Financial institution need sturdy funds on the utility to present funds to strengthen the grid to accommodate renewable energy.
Sri Lanka should spend billions of {dollars} to construct a ‘good grid’ and in addition arrange batteries, pump storage vegetation to hold daytime power to the night time and flywheels or different expertise to enhance inertia.
Industrial borrowings for investments – particularly if distribution just isn’t privatized – will even be tough with out income.
Within the June tariff resolution allowed prices have been 279.2 billion rupees, however allowed revenues was solely 267 billion rupees, on the premise that there was an 11.8 billion rupee extra on the majority provide tariff account, regardless of current losses.
Although depreciation is allowed – which in idea ought to pay for capital prices financed by loans – the break-even doctrine dooms the CEB into financing all capital expenditure purely by loans and no means to internally generate funds to function an fairness buffer.
This may be problematic for an company whose essential shareholder went bankrupt and has a low credit standing. On account of not permitting value hikes previously (in addition to foreign money depreciation), the CEB had 421 billion rupees of amassed losses as of March 2025.
In Sri Lanka even leasing firms should not allowed by the central financial institution to present 100% credit score to prospects to purchase a car via mortgage to worth ratios.
Associated : Sri Lanka SOEs face 4.8-pct danger premiums for sovereign ensures: Harsha
After authorities ensures given to SOEs contributed to a sovereign default and SriLankan Airline’s defaulted bond prevented upgrades of sovereign, authorities ensures for CEB to borrow additionally face hurdles and extra prices.
(Colombo/June13/2025)
